dissolution of a firm

why no entry is passed when a creditor is settled by giving an asset
for eg p&m (bv 60000) was handed over to a creditor at 10% discount

how this loss of 10% will get recorded

asked Mar 29, 2015 in Partnership-Dissolution of a Partnership Firm by deepz (143 points) 1,055 views
edited Mar 29, 2015 by deepz

1 Answer

0 votes
When dissolution is started all assests accounts (except Cash/Ban) are transferred to the debit of Realization A/c.  Similarly all liabilities are transferred to the credit of Realization A/c.  Any free reserves/accummulated loses are credited/debited to partners' capital accounts.  So only Bank A/c, Realization A/c and Partners' capital accounts remain open in the books.  So if a creditor is handed over an asset, no entry is passed because neither creditors accoount or asset's account is open.  So no journal entry can be passed.  In the same journal entry, we cannot debit Realization A/c and credit Realization A/c.

What will happen if an asset is handed over to a creditor at 10% discount, how this discount will be recorded?  Let us take an example, there is only one Machine of Rs.60000 and a creditor of Rs.54000.  There are no other assets and liabilities.  These will be journal entries:

1. Realization A/c                  Dr.   60000

       To Machine A/c                                      60000

2. Creditors A/c                      Dr.    54000

       To Realization A/c                                  54000

3. Partners' Capital A/c         Dr       6000

        To Realization A/c                                   6000
answered Mar 29, 2015 by jbsclasses (3,971 points)
then what if an unrecorded asset is taken by a creditor. as unrecorded asset isnt accounted in realisation a/c, so there will be a credit balance of the creditor as no entry is passed.

and in the above case have you made any assumption as creditors value is not given so we will have to assume that creditor has taken it in full settlement
and sir all profits and losses at the time of dissolution are routed through realisation a/c?
1. If some unrecorded asset is given to the creditor, then definitely Realization A/c will show credit balance, that is actually a gain.  This gain represents gain on account of settlement of creditor with unrecorded asset.

2. In the above question, creditors are taken at Rs.54000.  Read carefully, the example I have taken there, I mention clearly that Machine is valued at Rs.60000 and creditors at Rs.54000.

3. Actually all transactions with outside parties are conducted through realization account only, so resultant profit/loss any is automatically get recorded in the Realization A/c.